Camtek Ltd (CAMT) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's First Quarter 2021 Results webinar. My name is Kenny Green, and I'm part of the Investor Relations' team at Camtek. All other than the presenters are currently muted. Following the formal presentation, I will provide some instructions for participating in the live Q&A session. I'd like to remind everyone that this conference call is being recorded, and the recording will be available on Camtek's website come tomorrow. You should have received by now the company's press release and if not, you can review it on the company's website.

With me today on the call, we have Mr. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO. Rafi will open by providing an overview of Camtek's results and discuss recent market trends. Moshe will then summarize the financial results of the quarter. Following that, Rafi, Moshe and Ramy will be available to take your questions.

Before we begin, I would like to remind everyone that certain information provided on this call are internal company estimates, unless otherwise specified. These statements are only predictions and may change as time passes. Statements on this call are made as of today, and the company undertakes no obligation to update any of the forward-looking information contained, whether as a result of new information, future events, changes in expectations or otherwise. Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual events or results to differ materially from those projected including as a result of the effects of general economic conditions, the effect of the COVID-19 crisis on the global market and other markets in which we operate, including the risk of a continued disruption to our and our customers, providers, business partners and contractors' business as a result of the outbreak and effect of the pandemic, which related to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which we expect to generate significant portions of our revenue for the foreseeable future but also Taiwan and Korea, including the risks of deviations from expectations regarding timing, size of orders from customers in these countries, changing industry and market trends, reduced demand for services and products, the timing development of new services and products and their adoption by the market, increased competition in the industry in price reduction and as well as due to risks and certainties identified in the company's filings with the SEC.

Please note that the safe harbor statement in today's press release also covers the contents of this conference call. Furthermore, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results and evaluate the company's future performance. We believe that the presentation of non-GAAP financial measures are useful to investors' understanding and assessment of the company's ongoing cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release. And with that, I'd now like to hand over the call to Rafi Amit, Camtek's CEO. Rafi, please go ahead.

Thanks, Kenny. Good morning, and thank you for joining our call today. High demand in our markets, excellent performance of our systems and the strong position that Camtek has gained in the market allow us to continue demonstrating record financial performance quarter after quarter. We ended the first quarter of 2021 with $57.4 million revenue, 51% gross margin and 27% operating margin. The impressive profitability is a result of a rapid increase in sales and favorable product mix.

Before I review the first quarter, I would like to give a brief overview of the market environment. We are experiencing demand from all territories and especially from Asia. We expect to continue showing an increase in sales in the next 2 quarters. Our revenue guidance for the second quarter is $63 million to $65 million. There are several market trends driving the demand for semiconductor component and for our systems. The demand for products such as laptop and tablet that had been stabilized before COVID-19 has increased due to working from home. Working from home has also led to heavy investment in data center, cloud and communications infrastructures.

The massive amount of data that is sent and stored in the cloud is driving demand for advanced memory, AI devices and high-performance computing. 5G cellular communications has been adopted by the market earlier than expected resulting in high demand for electronic components. 5G cellular phones contain more RF devices, cameras and advanced packaging compared with the previous generations, thus requiring more inspection and metrology of all components.

The automotive industry is also undergoing major changes with the shifting to electric cars and advanced driver assistant systems. Technologies, resulting in demand for extensive electronic components. These components must meet 0 defect policy requiring 100% inspection of all components in cars. We see adoption of high-end advanced packaging in new devices as the industry is driving smaller geometric and using heterogeneous integration to deliver products with higher performance and lower power consumption. We are a major player in this space and we expect to expand our business as the industry is implementing new applications with high-end advanced packaging.

Regarding Q1 highlights. 88% of our sales came from Asia, with China being the largest territory. 50% of our installed system are for advanced packaging applications, which is expected to continue growing in the coming quarters. Other applications in which we play a major role are compound semi, MEMS, CIS, RF and macro defect inspection in the front end. During the quarter, we delivered multiple systems order to several Tier 1 customers as well as single system order to over 20 customers. We continue to execute well under the COVID-19 circumstances. Most of our employees in Israel are vaccinated and returned to work from office, which will no doubt, improve our overall efficiency.

To summarize, high demand for semiconductor components has been leading to an increasing demand for inspection systems. Camtek can provide its customers with reliable, high-performance systems tailored to their special requirements. Camtek is strongly positioned in the market and as things stand today, we expect 2021 to be an exceptional record year in sales, growth and profitability.

I would like to hand over to Moshe for a more detailed financial discussion of the financial results. Moshe?

Thank you, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appear in the tables at the end of the press release issued earlier today. First quarter revenues came at a record $57.4 million, an increase of 90% compared with the first quarter of 2020 and 80% compared with the previous quarter. Assuming the mid-range of our Q2 guidance, we expect the revenue in the first half of 2021 to be 80% higher than the same period last year. Gross profit for the quarter was $29.1 million. The gross margin for the quarter was 50.7% versus 45.2% in the first quarter of last year and 48.2% last quarter.

The improvement in the gross margin was due to the significant growth in revenues as well as more profitable product and sales mix this quarter. Operating expenses in the quarter were $13.5 million. This is compared with $10 million in the first quarter of last year and to the $14.2 million reported in the previous quarter. The decrease from the previous quarter is mostly due to a more favorable sales channel mix. Operating profit in the quarter was $15.6 million compared to the $3.7 million reported in the first quarter of last year. Operating margin was 27.2% compared to 12.2% in the first quarter of last year and 18.9% last quarter.

The rapid growth in revenue, while we are still in the process of adjusting our expense structure to support this increased business volume, contributed to the high operating margin. Yet, I expect that our operating profitability will be ahead of our model. Net income for the first quarter of 2021 was $14.6 million or $0.33 per diluted share. This is compared to a net income of $3.6 million or $0.09 per share in the first quarter of last year. Total diluted number of shares as of the end of Q1 was 44.5 million shares.

Turning to some high-level balance sheet and digital metrics. Inventory level went up by $5 million to support the continued growth expected in the coming quarters. Accounts receivables went up by $13.5 million due to the increased sales and timing of collection. We generated $2.7 million in cash from operations in the quarter. This quarter's cash flow was affected by the above-mentioned working capital requirement. Net cash and cash equivalents and short-term deposits as of March 31, 2021, were $169.9 million. And together with the $10 million that we have in long-term deposits, the total cash and deposits amounted to $180 million. This compared with $177.8 million at the end of 2020. With the current business momentum, we expect revenues of $63 million to $65 million in the second quarter. And with that, Rafi, Ramy and myself will be open to take your questions. Kenny?

(Operator Instructions) Our first question will be from Craig Ellis of B. Riley.

Congratulations on the very strong first quarter results and second quarter outlook team. I'll start with a clarification just on to income statement items. Moshe, for operating expense, you talked about expanding to support growth in the business. How quickly can operating expense dollars expand? And then secondly, related to the income statement, very nice gross margin improvement. And with the increase in the second quarter, should we expect the volume part of the gross margin drivers to mean that gross margin could even expand further in 2Q?

Okay, Craig. So I'll start with the second question. With respect to the gross margin, overall, indeed, the business volume contributed to the improved gross margin. Also, the product mix was very favorable this quarter. We believe that the company can operate within this magnitude in the next few quarters. So we are talking between 50% to 52% gross margin in the coming quarters.

With respect to our operating expenses, obviously, with the increased volume will increase operating expenses to support it. The main item that will be increased is R&D, obviously, as well as sales and marketing, which has direct relationship to the business volume and sales channel, whether we are working direct or indirect has a major impact on the operating expenses. So it will go up but not significantly in the coming quarter. So such that we expect operating profitability to remain high this year.

That makes sense. And then the first real question is for Rafi. Rafi, I think I heard in your prepared remarks an expectation for the third quarter's revenues to increase sequentially. So the question is really twofold. One, given the trailing 5-quarter average sequential revenue gains have been around $6 million or $7 million, is that a reasonable expectation for the third quarter? And where do you have comparatively higher visibility in your business for the third quarter and the back half of the year across CMOS Image Sensors, Front-End Macro Inspection or High-Bandwidth Memory?

I can tell you, in general, as we said, we can see continue growing in second quarter and also in the third quarter, I believe we can see a few million each quarter growth rate. Regarding the type of applications, as we said before, in general, the advance packaging is the major one. But all of them, we -- as we mentioned before, we can see compound semi, CMOS Image Sensors, RF, MEMS, all of them continue about in the same level.

That's helpful. And then finally for me, the company has a very substantial cash balance of $180 million, including $10 million in securities. So the question is, how are you thinking about redeploying that to create value? I know in a COVID world, it's hard to get out and do the things that are needed, that are often precedent actions to M&A. But can you just express how you're looking at activating that cash for creating further value for shareholders?

Okay. Look, we invest a lot of efforts of searching for available companies for M&A. I would say that assuming we -- eventually, we find a good company, hopefully we can visit, we can make due diligence, and we can come to decision. This is something that is unclear at this point. It's depending where some territory, you can fly, you can visit. Some of them, you cannot do it. So we don't know yet. We have few potential company that we consider. And definitely, this is one of our strategy to do it, and we invest a lot of efforts. But it's too early to say something. I would say when we find a company, when we start the process, we will share it with the public.

Okay. Our next question will be from Charles Shi of Needham.

Can you hear me?

Yes, we can.

So I wanted to ask a slightly longer-term question. So a little bit looking beyond 2021 into 2022. So, first, let me start with your memory business. One of your largest memory customer, yesterday announced that they are pulling in 2022 CapEx into '21. And the decision was kind of made near the end of last month. And I know you've been expecting memory revenue, which has been quite muted since last year, could pick up as early as the end of this year or first half '22. Do you see any of the pull-ins, I mean, maybe not specifically from this customer, but the overall DRAM or memory in general into the second half this year.

Ramy, would you like to answer, please?

Yes, I will answer. Look, Charles, in general, we see a lot of activity in this space, and we're working very closely with our customers. And I expect that there will be business. I still believe it will only happen starting early next year, if there will be any (inaudible) , of course, we will be able to accommodate it. So -- but I'm not sure we will see it in the second half, I believe it will be -- if any, it will be very late this year, early next year.

Okay. Ramy. So it looks like there's -- at least for now, there's no change in terms of the outlook for your memory side of the business. So I forgot to...

No change.

Great. So maybe let me move on to the other major segment, market segment for you guys CMOS Image Sensors. I put you -- Rafi you did say you expect the revenue will maintain at about the same level throughout this year, very steady, stable and continue the strength. I wonder whether you're seeing any signal for 2022, whether investment level for CMOS Image Sensors can up -- go up again next year. I think the one thing we did see here, one of the largest CIS customers told me last night that it did an update on their long-term -- mid- to long-term CapEx, and think they are raising their CapEx up by 25% for the next 3 years relative to the previous 3-year period.

I wonder, is it the right expectation for us to see your CIS revenue to go back to the 2020 level or close to that level next year, and which means year-over-year growth from this year's level.

So, first of all, this year level is not low. We will see about 10% of our revenues significantly decrease compared to last year. So 10% of the business this year will go to CMOS Image Sensors. And it's very hard to say at this stage whether we will see the increase or what is the magnitude of the increase. In general, we're speaking with several customers. They are all talking about adding capacity for the foreseeable future need late this year, beginning of next year. So I do expect that '22 will be a positive year for the sales in sensors, whether it will reach last year, it's hard to say, but definitely, it will be a positive year for this segment.

My last question. We know we're talking about potential upside for memory, potential upside for CMOS Image Sensors. On your advanced packaging side of your business, definitely, this year is very, very strong. And I think some of the concern, I mean, more pessimistic people would think maybe your business on that side of advanced packaging side could be peaking. Obviously, you have a very well diversified business. You have posted 7 consecutive year of growth because of your diversified exposure to different end markets; however, specifically on advanced packaging, I wonder, what your early view about 2022 slide at this point of time?

Well, if we look from what we talk with our customers and what we look at understanding the trades, definitely, we believe that the advanced packaging will continue to grow in the foreseeable future, meaning in the next few years. Now one of the major additions integration. Which is primarily today for high-performance computing. But definitely, this is a trend, Rafi mentioned it in the script. So we believe that this market continues to grow. There are a lot of new devices that are adopting advanced packaging for all the good reasons.

So if today, most of the business is spending or packaging and fan-out. And I would say the produce integration is something in the range of about 10% of the business, that 10% will definitely continue to grow and become far more significant in the next few years. So if we look from the market point of view, we understand the trends and where our customers are going. Definitely, the advanced packaging will continue to be a major portion of our business and will continue to grow.

Next question will be from Gus Richard of Northland. (Operator Instructions)

Can you hear me?

Yes.

I just want to cut your business a little bit differently and think about just applications in terms of 2D, 3D and other applications that are driving your inspection tools. If you give us a little color around that and sort of where you're winning when you think about it in that dimension?

Ramy, please?

I am trying to think where we are willing to let's say broadly, if we think about . So on the -- those on the advanced packaging, I would say 50% is what we call 3D or the metrology portion, including in the other 50% of the business. This is definitely a business that is -- we started to gain only, I would say, 2 or 3 years ago. So that's definitely an area that we are starting to dominate in the last few years. So I would say this is on the advanced packaging, that these 2 businesses will continue to grow. Now if we look at the other businesses. So if you take for example, 5G. So 5G is driving very strongly, our sales in Image Sensors and it's finding the overall demand in the semiconductor that we see.

If you look at the automotive business, this is coming, we see there the compound saving and the power applications, we see a very strong driver. And again, the overall 2D business is growing, and we are very well entrenched, I would say, in several major providers of this segment. If we continue and move along and look at the cloud, definitely there, it's the memory business, high-performance computing with the heterogeneous integration that will take a big share, again, there, we are very well positioned.

And if we talk about the, I would say, the overall business like laptop, tablets, all of the above, then the overall semi consumption affects us very positively. You will see the demands coming from the (inaudible) and the IDMs that we are serving. And again, there, we see the high-performance computing, especially from the high-end portion like the gaming application. So there we gained twice on the memory and also on the heterogeneous integration. So overall, when we look at the different segments of the end products and the different applications that we are supporting, so I think we are well positioned in all of the above. Did I answer you, Gus?

That's very helpful. And let me try to cut it yet another way. Semiconductor unit growth is roughly 15% this year, it's kind of what people are saying, you're growing 80% in the first half. Clearly, outperformance relative to unit growth. When you think about the applications you address and the growth of those applications versus and new applications versus market share gains, can you attribute your outperformance on a relative basis to those 2 metrics, again, market share gains and outperformance of the applications you address?

So first of all, I understand the question, it's very hard to give you a very quick answer. But definitely, we are gaining market share. And I think in the areas that we are strong in the advanced packaging, definitely we are gaining market share. And I know there are specific customers that switched from the competition to us. So that's definitely to give you whether how many percent of the growth it is, it is very hard to say. But it is definitely significant.

I think where we are growing in the business and taking market share is the overall inspection business that we didn't participate in the past. If we talk about the compound selling and power area, we never participated there. If you talk about the content, which is, roughly, I would say, 10% of our business, definitely, it's a new business and we are growing, definitely taking market share.

I think we took some market share in the CMOS Image Sensors last year. I'm expecting this to attribute to some of the growth that we'll see this year as well. And so it's definitely a mix between these 2 areas. But it's very hard for me to tell you that 40% will come from there, 40% will come from others. And also, we will end up the year, and we will see where the growth is coming from.

I think there is one more aspect that we need to keep in mind. A lot of the applications that we are talking require 100% inspection. So the growth of the inspection and the metrology is much higher than the growth of the business or the actual numbers that we see, the 20% that you see in equipment. I think roughly related to it a number of times during the [chip] discussion.

And I think this really plays very well to the actual segment that we are serving. If you take, for example, heterogenous integration. This kind of process requires because it's a new process, because it is very complex, it requires a lot of inspection in metrology steps, which play very much into our play, into our growth. So I think it is more complex, but I hope I was able to give enough color into your question.

I would like to add one more comment about this. Because when you talk about 15% growth in the semiconductor, I assume you talk about, let's say, number of wafer of equivalent to 12-inch wafers. But actually, we inspect the -- not the amount of wafer, but sometimes we inspect the complexity of the wafers. Assuming that we can see a trend moving from wire bonding to wafer-level package. It's totally different in wire bonding, maybe nobody make an inspection or make simply. When you move to wafer-level package, you do 100% inspection. So technology change, definitely change the demand for inspection machines. You have to consider it.

The same is the DRAM -- is the -- when we talk about DRAM, again, moving from wire bonding to 3D IC. All this shifting change the demand for equipment -- inspection equipment.

The 15% was referring to unit growth, just to be clear. Thank you. That's always very helpful.

We'll now move over to Patrick Ho of Stifel.

Congrats on a nice quarter. I'm not surprised to see the inventory levels increase given the strong demand environment. But maybe Moshe, if you can give a little color whether you're building any inventory given some of the supply chain shortages that are in the ecosystem overall. Is the inventory build, just specifically on the near-term demand? Or are you trying to build a little bit of buffer to ensure that the momentum that you've built over the last few quarters can continue?

So Patrick, yes, we -- obviously, most of the inventory is for immediate use in the next couple of quarters, but given the shortage in order to be well prepared for the growth beyond that, we are also building inventory of -- certain inventory pieces that we feel that might be in shortage. So there are some elements in the inventory, which relates to the shortage.

Great. That's helpful. And maybe as my follow-up question for Ramy. You gave a lot of good color in terms of the heterogeneous integration, some of the applications there that are driving demand as we look into next year. Can you talk about qualitatively the development work you're doing with a lot of potential customers because -- not only just the heterogenous integration, but a lot of new processes, a lot of new stacking techniques are emerging. And how long does it take in these type of development works to turn it from the engineering side over to high-volume buy for the customer?

From the customer's point of view, I think you know that these kinds of technologies have been developed for quite a few years. The concepts have been on the drawing room -- development stage for quite a -- I think today, we are in the stage where these technologies are ramping to production. We believe that within 2 to 3 years, they will be very common in the industry and [a jewel] as we talk about high-performance computers will be based on heterogenic integration.

Today, you already see graphics cards and certain vendors are already using these technologies. The High-Bandwidth Memory is definitely a portion of the heterogenous integration, which used more CPUs by quality of venues. So definitely this is something that is already happening and is starting to move along.

So from our point of view, definitely, there is a lot of development. What we have been doing is here, a lot of hard work is just working with our customers and customers, working with them on the application, and this is something that is ongoing as part of our business. And so this is, I would say, one portion. And alongside, we have a road map, understanding exactly what our customers will need in, I would say, 2 to 3 years. And we are developing products and technologies that will meet their requirements. So I believe that we are well positioned to respond to the market needs in the specific applications that we are a major player.

(Operator Instructions) We have a follow-on question from Charles Shi of Needham.

Just want to go back to some of the comments. So you said the 55% of the systems installed are (inaudible) advanced packaging (inaudible) . I assume because of a slightly higher 3D metrology in the mix for advanced packaging applications, but revenue contribution's probably slightly higher than that. I wonder for the full year, given that grew total revenue, probably a little bit above your original expectation, whether advanced packaging contribution this year is above the 60% number, this sort of indicated 3 months ago?

Or is this more approaching 70% for this year? And another one, maybe I would just ask you together, any update on your macro content inspection side of the business? Is it still expecting to grow in line with the corporate growth this year? Or do you expect a slightly outperformance given achievement momentum you're making?

So I think if you look at -- Charles, I'll start with the advanced packaging. So we started and we said we were about just about 50% this year. And I think this portion will probably grow a little as we move along in the year. I think it will strengthen, we have the potential this year to reach even close to 60%. This segment is very, very strong this year. So I think we will be anywhere between the 55% to 60% this year. That might be a little bit above our expectation.

And no doubt with the heterogeneous integration and all the fanout and spending activities, definitely there is a lot of growth in this part of the industry. Regarding the front end and the, what we call, the macro inspection function. I don't know it will outperform. This year, definitely, we are continuing to grow this business. And we are [getting] to new customers. We have broadened our presence. I'm not sure at this stage, if we are going to outperform what we have done in previous year, it will be definitely be in the double-digit in numbers this year.

We now have a question from Raymond Rund of Shaker Investments.

I was wondering if you could just give us the quarterly breakdown in revenue by application. If you gave that earlier, I'm sorry, but I didn't hear it?

Raymond, we don't provide specific details of the breakdown of the application. But as we've mentioned before, on a very high level, we said that we are around 55% in advanced packaging. And we said around 10% (inaudible) and the rest is all other applications that we support.

I believe that ends our Q&A session. Before I hand over back to Rafi for his closing statements, I will let you all know that in the coming hours, we will upload a recording of this conference call to the Investor Relations section of Camtek's website at www.camtek.com.

I would also like to thank Rafi, Moshe and Ramy for hosting this call with investors. I also want to thank all of you for joining this call, and we would appreciate any feedback you have with regard to our new format. And with that, Rafi, I would like to hand over to you for your closing statements. Please go ahead.

Okay. I would like to thank you all for your continued interest in our business. Again, I would like to thank all our employees and my management team for their tremendous performance, and we look forward to continue it. To our investor, I thank your long-term support. I look forward to talking with you again next quarter. Thank you, and goodbye.